There's a rift in the market-watching and economy-watching fraternity — just as there was last year, and the year before that. Some believe that a recovery is nigh, and that the major stock markets are anticipating it. Others believe the market is hoping — or dreaming — rather than anticipating, and that the economy is actually weaker than it seems.
There are plenty of reasons for this phenomenon, but one of the major factors is employment — or rather, the lack of it. Even as the various parts of the economic picture have been improving in the U.S., jobs have been disappearing. This makes productivity numbers look great, but jobless statistics look bleak. So which one should investors be looking at?
Last week, markets were rattled by a jobs report that was much worse than expected. According to preliminary data, instead of creating 12,000 jobs, the U.S. economy shed 93,000 jobs in August — the seventh month in a row jobs have been lost, and the largest such figure since March. According to some estimates, job growth during the current "recovery" has been the worst since statistics were first collected in 1939.
In case you were wondering, the U.S. recession ended in November, 2001 — according to the National Bureau of Economic Research, which tracks such things. And yet, the U.S. economy has lost more than a million jobs since then. Most of those jobs have been lost in the manufacturing and industrial sectors of the economy, sectors which in the past have been the engine for economic growth.
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In fact, the only thing that kept the U.S. unemployment rate from climbing to the upper 7 per cent range from the 6 per cent level was that hundreds of thousands of Americans have apparently given up hope of ever getting a job and have left the prospective workforce altogether. In August, for example, more than 500,000 people said that they had stopped looking for work.
After most recessions, labour market experts say, the U.S. economy begins to create jobs within a matter of months — most of which have tended to come from the manufacturing sector. Those new workers in turn spend more, which helps to boost the consumer side of the economy. This time around, the experience has been the exact opposite: consumers have kept spending and jobs have kept disappearing.
The flipside of all that doom and gloom, of course, is that the U.S. economy has never been more productive — in the purest sense of goods produced per hour of work. In the second quarter, non-farm productivity rose at an annualized rate of 6.8 per cent, the strongest growth since the first quarter of last year. Needless to say, firing people is a great way to improve your productivity, provided everyone else works just as hard.
Some market-watchers say the only thing an investor should be concerned with is productivity and profit growth, and so long as those factors are increasing, job losses are irrelevant. Job creation is something for politicians to worry about, they argue, not the stock market. Indeed, the markets seem to have shrugged off the jobless numbers quite easily, and keep hitting new highs.
The other side of the argument, however, is that consumers might find it difficult to continue spending all that borrowed money they've been spending — which has acted as a prop for the economy during a slow period — if they are either out of a job or concerned about their jobs. That is the larger risk, economists say, particularly when consumer spending has been one of the few bright spots during the downturn, and that is something investors should definitely be concerned about longer term.
There's an additional factor that's worth noting, which is that the job losses this time around are different than they were in the previous recession, according to the Federal Reserve Bank of New York. In a recent report, the central bank said that in contrast to 1990-91, most of the jobs that have been lost so far appear to be victims of a structural shift in the makeup of the U.S. economy, rather than just a short-term layoff sort of situation. In fact, close to 80 per cent of the jobs lost fall into that category.
The problem with structural shifts is that they result in job loss that is pretty well permanent. In other words, many of those jobs may never come back. Some economists worry that this could extend the length of time before hiring begins in earnest again, since entirely new jobs will have to be created, something that takes longer than just bringing employees back after a layoff.
Optimists argue that the U.S. economy is only part way through a transformation that has been accelerated by technology, and that this accounts for the increase in productivity — since fewer employees are needed for the same amount of work, particularly in the manufacturing sector. But will those redundant employees find jobs elsewhere, and if they don't, will they keep spending?
These are the questions the U.S. economy is currently wrestling with, and it will likely continue to do so for some time to come.
E-mail Mathew Ingram at mingram@globeandmail.ca
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